From Tax Exemptions to Tax Credits
A Paradigm Shift
Tax authorities in Pakistan are struggling to put in place a balanced tax policy for taxation of income, goods and services. Recently, on March 22, 2021, the government has implemented the Tax (Second Amendment) Ordinance, 2021, to secure $500 million tranche from the International Monetary Fund (IMF). Through this Ordinance, the government has withdrawn certain tax exemptions by deleting various Clauses of the Second Schedule to the Income Tax Ordinance, 2001 (ITO 2001), and also introduced new tax credits to encourage investment activities in specific sectors of the national economy. The government has also removed certain tax credits.
Tax Exemptions Withdrawn
The following income, profits and gains of persons, which were exempted from tax, will be subject to tax now:
Ø income from voluntary contributions, house property and investment in securities of the federal government derived by Shiekh Sultan Trust (Clause (57)(1)(iii);
Ø income derived by Sukuk-holder in relation to Sukuk issued by the Second Pakistan International Sukuk Company Limited and the Third Pakistan International Sukuk Company Limited, including any gain on disposal of such sukuk (Clause 72A);
Ø Profit on debt derived by Hub Power Company Limited on or after July 1, 1991, on its bank deposits or accounts with financial institutions directly connected with financial transactions relating to the project operations (Clause 74);
Ø Profit on debt derived by any person on bonds issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, for a period of five years with effect from July 1, 2018 (Clause 90A);
Ø Income derived by the Libyan Arab Foreign Investment Company being dividend of the Pak-Libya Holding Company (Clause 104);
Ø Income derived by the Government of Kingdom of Saudi Arabia being dividend of the Saudi-Pak Industrial and Agricultural Investment Company Limited (Clause 105);
Ø Income derived by Kuwait Foreign Trading Contracting and Investment Company or Kuwait Investment Authority being dividend of the Pak-Kuwait Investment Company in Pakistan from the year of incorporation of Pak-Kuwait Investment Company (Clause 105A);
Ø Gain by a person on transfer of a capital asset, being a bond issued by Pakistan Mortgage Refinance Company to refinance the residential housing mortgage market, during the period from July 1, 2018 till June 30, 2023 (Clause 110C);
Ø Profit and gains derived by Khalifa Coastal Refinery for a period of twenty years beginning in the month in which the refinery is setup or commercial production is commenced, whichever is later (Clause 126B);
Ø Profit and gains derived for a period of five years from the date of start of commercial production by the following companies from specified projects that have been declared ‘Pioneer Industry’ by Economic Coordination Committee of the Cabinet. The Companies and projects included were M/s. Astro Plastics (Pvt.) Ltd. from their Biaxially Oriented Polyethylene, Terephthalate Project and M/s. Novatex Ltd. from their Biaxially Oriented Polyethylene Terephtalate Project (Clause 126G);
Ø Profit and gains derived by Bosicor Oil Pakistan Limited for a period of 7-1/2 years beginning from the day on which the refinery is set up or commercial production is commenced, whichever is later (Clause 132A);
Ø Income derived by a non-resident from investment in OGDCL exchangeable bonds issued by the Federal Government (Clause 135A); and
Ø Income derived by Islamic Naya Pakistan Certificates Company Limited (INPCCL). INPCCL have also been made part of Table I of Clause 66), which means there is no change in exemption status (Clause 148).
Tax Credits Introduced
Nevertheless, the government has introduced the following important tax credits to encourage investment:
A new section 65F is inserted by the Income Tax (Second Amendment) Ordinance 2021 to allow the following taxpayers a tax credit equal to 100% of the tax payable including minimum and final taxes provided 80% of the export proceeds are brought into Pakistan in foreign exchange remitted from outside Pakistan through normal banking channels:
Ø persons engaged in coal mining projects in the Sindh Province supplying coal exclusively to power- generation projects;
Ø a startup for the tax year in which the startup is certified by the Pakistan Software Export Board and the following two tax years;
Ø persons deriving income from exports of computer software or IT services or IT-enabled services up to the period ending on June 30, 2025.
The following conditions are required to be fulfilled for claiming tax credit under section 65F of ITO 2001:
Ø the return has been filed;
Ø the tax required to be deducted or collected has been deducted or collected and paid;
Ø withholding tax statements for the immediately preceding tax year have been filed; and
Ø sales tax returns for the tax periods corresponding to the relevant tax year have been filed.
Similarly, the Income Tax (Second Amendment) Ordinance 2021, has also inserted section 65G into ITO 2001 to allow tax credit equal to 25% of the amount of investment made in purchase and installation of new machinery, buildings, equipment, hardware and software, except self-created software and used capital goods (called eligible capital investment) by the following taxpayers (called eligible taxpayers):
Ø green field industrial undertaking engaged in the manufacture of goods or materials or the subjection of goods or materials to any process which substantially changes their original condition; or ship-building. However, taxpayers to be eligible for tax credit requires to be incorporated between June 30, 2019 and June 30, 2024 and also taxpayers must not be formed by splitting up or reconstitution of an undertaking already in existence or by transfer of machinery, plant or building from an undertaking established in Pakistan prior to commencement of the new business and is not part of an expansion project; and
Ø industrial undertaking set up by June 30, 2023, and engaged in the manufacture of plant, machinery, equipment and items with dedicated use (no multiple uses) for generation of renewable energy from sources like solar and wind.
Tax credit under section 65G of ITO 2001 will be available to eligible taxpayers on eligible capital investment against tax payable under the provisions of ITO 2001 including minimum and final taxes for a period of five years commencing from the date the industrial undertaking is set up. The tax credit not fully adjusted during the year of investment requires to be carried forward to the subsequent tax year and may be carried forward for a period not exceeding two years.
However, the Income Tax (Second Amendment) Ordinance 2021 has omitted section 65D of ITO 2001. Therefore, tax credit under this provision will not be available to taxpayers’ companies formed for establishing and operating a new industrial undertaking including corporate dairy farming, which will set up a new industrial undertaking including a corporate dairy farm. However, existing taxpayer companies already availing tax credit under this section will continue to avail tax credit under repealed provisions for remaining years.
The author is serving as Additional Commissioner Inland Revenue at Federal Board of Revenue, Pakistan. He can be contacted at email@example.com